Brighter Days Ahead

The world of biotechnology changes every year, but a global shift might now be underway. On February 4, 2011, the website ChinaBio Today reported that venture capitalists (VCs) invested more than $1 billion in China’s life-science market in 2010—an increase of 319 percent over 2009. During the same period, VC investing in the U.S. looked almost flat by comparison. This disparity of VC dollars reflects a transition in which emerging markets are ushering in a new era of biotechnology enterprise.

The dramatic shift highlights what many say will be an ongoing trend, as R&D and biomanufacturing migrate to the East. For example, AutekBio, a contract manufacturing organization, received $120 million—the largest Chinese VC deal in 2010—from SUMA Ventures and the Chinese government to build a biologic drugs– manufacturing facility in southern Beijing. (More on biotechnology in the BRICs nations—Brazil, Russia, India and China—appears in Scientific American Worldview’s Special Report, page 22.)

While China keeps pumping capital into biotechnology, 2011 is likely to remain challenging for many biotech companies worldwide. Nonetheless, the worst might be over. “Overall, the upcoming year will be a good one for the biotechnology industry,” predicts G. Steven Burrill, chief executive officer of Burrill & Company, a life sciences investment firm. He expects the financing environment to continue improving and for capital to remain available to fuel partnerships, mergers and acquisitions.

BIOTECHNOLOGY BOOSTS

Some metrics indicate that biotechnology could be recovering faster than the general economy. For example, publicly traded U.S. biotech stocks outperformed most other industry sectors last year. The Amex Biotech Index, for instance, ended the year with a whopping 38 percent gain, compared to an 11 percent rise for the Dow.

Although the percentage growth of VC investing in China surpassed that of all other countries, the U.S. market did see growth as well. In 2010, VCs invested $21.8 billion in 3,277 deals in the U.S., a 19 percent increase in dollars and 12 percent increase in deals over 2009, according to PricewaterhouseCoopers (PwC) and the National Venture Capital Association. Biotechnology investments, however, increased by only 3 percent in dollars and 8 percent in deals in 2010, with $3.7 billion going into 460 deals. This caused biotech to fall back to its traditional second-place status behind the software industry, which recaptured its lead by rising 20 percent to $4 billion.

Some experts, though, expect even more from biotechnology investing in 2011. As Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire, says, “I’m cautiously optimistic that we’ll see an uptick in the number of deals and dollars invested this year” by so-called “angel” investors—highnet-worth individuals who offer companies loans and equity financing.

However, some of the biggest factors shaping today’s biotechnology are mergers and acquisitions. Despite recent decreases in the financial value of public and private mergers and acquisitions, the outlook for 2011 appears bright. Mergers and acquisitions got a roaring start this year with Sanofi’s $20.1-billion acquisition of Genzyme in February. “I think it’s going to gear back up,” said Deme-trios Kydonieus, head of the strategic transactions group at Bristol-Myers Squibb, speaking at the BIO CEO & Investor Conference.

Other experts agree. Jim Greenwood, president and chief executive officer of the Biotechnology Industry Organization (BIO), says, “We are more optimistic this year than we were last year.” Now that the Affordable Care Act has been signed into law, he says, the investment community has a better grasp of its implications, such as reductions in Medicare and Medicaid reimbursements and the creation of a regulatory pathway for marketing biosimilar drugs.

To quantify their hopeful projections, experts often look to the number of biotech companies planning to launch initial public offerings (IPOs) to sell stock to the public. Only three U.S. biotech companies concluded IPOs in 2009. Last year, 17 managed to do so, although they sold fewer shares and at far lower prices than they had hoped. So far this year, at least 30 companies are lined up to go public. “The IPO window has crept open again,” says Greenwood. “And that’s a good sign.”

INVESTING AROUND THE WORLD

In 2010, biotech VC investment increased worldwide by 5 percent to $5.4 billion, according to BioCentury Online Intelligence. In Europe, VC funding jumped by nearly 50 percent, to $1.5 billion in 104 deals. Notable among these was the $98 million raised by Archimedes Pharma, a U.K.-based specialty pharmaceutical manufacturer. Despite such individual achievements, PwC estimates the public and private European biotech companies need to raise about $8 billion to develop and bring products to market, which leaves lots of fundraising to be done.

Signs of growth in biotechnology also appear in Canada, where last year 56 companies received $299 million in VC investments—a 38 percent increase over 2009—according to Thomson Reuters. Still, Canada’s public and private biotechnology firms desperately need more funding. Company executives are seeking $1 billion in R&D capital, according to PwC. As in Europe, the funds have not been readily available.

The key to the future depends on adaptation. Developing countries, including China and India, are learning from the mistakes of Western biotechnology and pharmaceutical companies, says Jo Pisani, a partner at PwC in the U.K. “They are now sidestepping the costly infrastructure that places burdens on companies in developed countries to create new business models that are leaner and more economical, as well as pioneering innovative products and processes,” Pisani explains in a recent commentary in Pharmaceutical Executive.

As it faces financial and competitive challenges, the biotech industry needs to develop a different business model, Pisani argues. This new model must embrace efficiency and innovation. Companies must share risks and resources by engaging in precompetitive collaborations, much as the automotive industry did to develop the hybrid engine. As Pisani writes, “There are considerable cultural, behavioural and practical hurdles to overcome if the industry is to succeed but, given the rewards collaboration can bring, they’re well worth resolving.”

{© JON KRAUSE}